Six Points To Consider Before Commencing An Arbitration

On October 10, 2012, I gave a speech at an Advocates’ Society program.  The program was  entitled Arbitration is the New Black.  My presentation focused on seven issues which should be addressed when a party is contemplating the commencement of an arbitration.

Starting the arbitration seems like the easiest thing in the world.  After all, the parties already have an arbitration agreement which provides for the arbitration.  So what is the big deal?

That approach can lead to real problems.  The commencement of arbitration is as important a step in the proceeding as the commencement of an action in court.  In fact, it’s more important because in the case of arbitration, there is no court in which to issue the initiating document.  Therefore, no court official determines that the document initiating the arbitration is proper.  The party starting the arbitration may be lulled into a false sense of security by the arbitration agreement and may be unaware of the formalities and the choices that are inherent in the arbitral process.

Here are Seven Points to Consider before Commencing an Arbitration:

1.      The limitation period

Some may think that the arbitration is not subject to limitation periods. It is. A limitation period for an arbitral claim may be established in two ways.

First, the arbitration agreement may itself contain a limitation period.  For example, insurance policies often contain limitation periods.  If the period is missed, the claim may be lost.

Second, an arbitral claim will be governed by the general law of limitation of actions.  In Ontario, section 52(1) of the domestic Arbitration Act, 1991 provides that the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and the claim made in the arbitration were a cause of action.  Section 4 of the Ontario Limitations Act, 2002 establishes a general limitation period of two years from the date of discovery of the claim. So, unless another statutory limitation period applies, a domestic arbitral claim governed by Ontario law must be commenced within two years of the discovery of the claim.

As far as international commercial arbitrations are concerned, the Ontario International Commercial Arbitration Act (ICAA) does not establish a limitation period for the commencement of an arbitral claim nor refer to a general limitation period.  If the arbitral claim is subject to Ontario law, then the Ontario Limitations Act, 2002 will presumably apply. There may be arguments about which limitation law applies to a claim in an international commercial arbitration.  The law of the place of the arbitration or the substantive law applicable to the contract are two candidates and the debate may be resolved differently by the courts in different jurisdictions.  So the limitation issue may have to be considered carefully in international commercial arbitrations.

Before leaving the limitation issue, it is well to remember that there is a limitation issue at the other end of the arbitration proceeding, namely, the limitation period for the enforcement of the award. For domestic arbitrations, section 52(3) of the Ontario Arbitration Act, 1991 provides that an application to enforce the award must be made within two years of the date that the applicant receives the award.

The Ontario ICAA does not contain a limitation period for the enforcement of the award. The general two year general limitation period in Ontario Limitations Act, 2002 will presumably apply if the award is sought to be enforced in Ontario.  In Yugraneft Corp. v. Rexx Management Corp., [2010] 1 SCR 649, the Supreme Court of Canada held that Alberta’s general two year limitation period applied to the enforcement in Alberta of an international commercial arbitration award made in Russia. Alberta had no limitation period that specifically applied to international arbitrations.  The Supreme Court held that the application for enforcement of the foreign arbitral award was an application for a “remedial order” within the meaning of the Alberta limitation statute, and therefore subject to the two year limitation period together with the discoverability rule.  It was not a judgment or court order subject to the 10 year period.

The mediation period

 A contract containing an arbitration clause may also contain a mediation clause.  The mediation clause may affect the commencement of the arbitration in two ways.

First, the mediation may be a precondition to the commencement of the arbitration.  If it is, the arbitration may be premature if mediation is not undertaken.  However, the mediation clause may be a permissible procedure, not a required procedure.  In this case, the failure or refusal of the parties, or one of them, to participate in mediation will not be a bar to the commencement of the claim.

Second, and as a corollary to the first point, if the mediation is, or is not, conducted, the limitation period can be affected.  If mediation is a requirement then the limitation period will not commence until the mediation is completed.  If the mediation is not required, then the limitation period will be running while the parties are fussing about mediation.

These issues were dealt with by the Ontario Court of Appeal recently in L-3 Communications Spar Aerospace Limited v. CAE Inc., 2011 ONCA 435, 2010 ONSC 4133, (reviewed by me in www.heintzmanadr.com, July 17, 2011) and Federation Insurance Co of Canada v. Markt Insurance Co of Canada, 2012 ONCA 218 (reviewed by me in www.heintzmanadr.com, May 5, 2012).

In the first case, mediation was held to be required.  Therefore, the cause of action did not accrue until the mediation was conducted, and therefore the action was still commenced in time.  In the second case, mediation was held not to be required.  Accordingly, the limitation period was running during the mediation and had expired by the time that the arbitration was commenced.

In Ontario, section 11 of the Limitations Act, 2002 provides that the limitation period does not run during any period in which the parties have agreed to have an independent third party resolve the claim or assist them in resolving it. The section does not necessarily avoid the issue of whether there was an agreement to mediate and whether that agreement requires mandatory mediation.

A further complicating factor is whether the mediation agreement is enforceable.  In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (which I reviewed in www.heintzmanadr.com, July 5, 2012) the English Court of Appeal held that a mediation clause is not enforceable unless the clause contains a minimum amount of procedural certainty.  The Ontario Court of Appeal’s decisions referred to above did not consider this issue. We can expect some party to assert in the future that the mediation agreement was not enforceable and therefore the limitation period was running during the mediation and expired before the arbitral claim was commenced.

 2.      The Commencement of Arbitration

The claimant in the arbitration must make sure that it uses the proper document and procedure to start the arbitration.  If it does not, then no arbitration will have been commenced and the limitation period may expire in the meantime.

Section 23 of the Ontario Arbitration Act, 1991 states three ways in which an arbitration may be commenced:

first, by serving a notice to appoint or participate in appointment of the arbitrator

second, by serving a notice requiring another party to appoint the arbitrator and

third by serving a notice demanding arbitration

Under article 21 of the Model Law attached to the Ontario ICAA, the arbitral proceeding is commenced by a request for that dispute to be referred to arbitration being received by the respondent.

The decision of the Ontario Court of Appeal in Penn-Co Canada (2003) Ltd. V. Constance Lake First Nation, 2012 ONCA 430; (reviewed by me in www.heintzmanadr.com, August 27, 2012) is a reminder of the importance of serving the right document.  One of the parties had undertaken a good deal of activity relating to the arbitration, including the commencement of court proceedings.  But the Court of Appeal held that it had not served a document qualifying as the commencement of the arbitration. Its later attempt to do so was served outside the limitation period.

3.      Objection to Jurisdiction

An objection to jurisdiction must be made on a timely basis. Under section 17(3) of the domestic Ontario Arbitration Act, 1991, the objection must be made no later than the beginning of the hearing, or if there is no hearing, no later than the first occasion on which the party submits a statement to the tribunal.  In addition, the objection to jurisdiction must be made as soon as the jurisdictional matter is raised, although the tribunal has the authority to consider a later objection if it considers the delay to be justified.

Under Article 16(2) of the Model Law attached to the Ontario ICAA, a plea that the arbitral tribunal does not have jurisdiction must be raised no later than the submission of the statement of defence, and a plea that the arbitral tribunal is exceeding the scope of its authority must be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal has authority to admit a later plea if it considers the delay justified.

These time limits are not necessarily the same. In particular, the claimant should be aware of the requirement in the Ontario ICAA to raise a pre-existing jurisdictional objection at time of the delivery of the Statement of Defence.

4.      Appointing the arbitral tribunal

a.      Need for speedy appointment

Before the arbitral tribunal is appointed, there is no way to determine anything within the arbitration.  The respondent cannot be compelled to deliver a defence.  An order that the proceeding has been validly commenced cannot be obtained, and other interlocutory matters cannot be dealt with. So appointing the arbitral tribunal is a key step in the arbitration.

Under section 10 of the domestic Ontario Arbitration Act, 1991, if the parties disagree about the identity of the single arbitrator or the chair of the arbitral tribunal, the Ontario Superior Court has power to appoint the tribunal. If the Ontario ICAA applies, then under article 11(4) of the Model Law attached to that statute, the Ontario Superior Court has a similar power to appoint the arbitral tribunal.

If the arbitration is held under the auspices of one of the arbitration institutions (such as the LCIA, ICC or BCICAC), then those organizations will appoint the arbitral tribunal, subject to the input of the parties as their rules may allow. An advantage of these arbitral institutions is that their appointment process may avoid lengthy court proceedings to appoint the arbitral tribunal. A disadvantage may be the lesser input of the parties into the selection of the tribunal.

b.      Discussions with the potential arbitrators

Selecting an appropriate arbitrator or chair of the arbitral tribunal will obviously be important. Identifying and avoiding conflicts of interest of arbitrators is equally important. For this reason, there may be legitimate reasons to write to or speak with a candidate for appointment.

However, these contacts are fraught with peril as they may create circumstances that themselves give rise to an appearance of bias. Thus, if the candidate is asked his opinion about the merits of the dispute, that conversation could well prejudice the candidate’s appointment.

The Chartered Institute of Arbitrators has guidelines about this process which are very helpful. They may be viewed on the Institute’s website: www.ciarb.org.

 

 c.   Agreement Appointing Arbitrators

If the arbitrators are appointed by way of agreement, the negotiation of that agreement is a good opportunity to address issues which were not dealt with in the arbitration agreement.  With a dispute now in existence, arrangements can be put in place to ensure that the arbitration is conducted cost effectively.

Those arrangements may include: the rules of procedure, so that rules appropriate for the specific hearing are used, not the rules of court; the confidentiality of the arbitration; and choice of law.

5.      The First Pre-Hearing Meeting

A significant advantage of arbitration is that it allows the parties to use a process which is suitable for the actual dispute and which will ensure that the dispute is resolved in a cost- effective manner. The time to start that process is the first meeting with the arbitral tribunal.

At the first meeting, the following procedures can be settled:

The schedule of all events and the date of the final hearing
The nature and dates for the exchange of pleadings
The scheduling of motions
The scope of documentary production and agreement on joint books of exhibits
Limits on discovery, or elimination of discovery
Preliminary lists of witnesses, including experts
The arbitration hearing briefs
The number of days of hearing

At the end of the first pre-hearing meeting, the arbitral tribunal can issue a Procedural and Schedule Order dealing with all these matters.

In order to obtain the maximum buy-in to this process, the parties should be present in person at the first pre-hearing meeting.

6.      Interim Relief

Finally, before the arbitration is commenced, consideration should be given to the necessity to obtain interim relief.

Various factors may relate to that relief: whether the relief must be obtained against third parties; whether the opposing party will likely refuse to obey an order granting the relief; and whether the relief must be enforced outside the jurisdiction of the court or the place of the arbitration.

No simple answer can be given about whether it is better to obtain interim relief from the court or the arbitral tribunal, but an informed decision should be made about that issue. Some of the factors that may be considered include the following:

  1. If the motion for interim relief is made to the superior court, then there will be no arguments about the limits of the court’s jurisdiction since the court has plenary powers. There may be a debate about whether the arbitral tribunal has the jurisdiction to grant the particular interim relief which is being sought.

Article 17 of the Model Law attached to the Ontario ICAA says that unless otherwise agreed by the parties, the arbitral tribunal may order such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute, and appropriate security be provided in connection with that measure. Section 18(1) of the Ontario Arbitration Act, 1991 says that an arbitral tribunal may make an order for the detention, preservation or inspection of property and documents that are the subject of the arbitration or as to which a question may arise in the arbitration, and may order that security be provided in that connection.  These provisions do not purport to give the arbitral tribunal unlimited interim powers. Therefore, the respondent to the motion may assert that the arbitral tribunal does not have jurisdiction to grant the particular interim relief claimed on the motion.

2.  If it is likely that the opposite party will abide by the order and the parties simply need a preliminary ruling on a matter, and if a faster hearing can be obtained before the arbitral tribunal than before a court, then the motion likely should be brought to the arbitral tribunal.

3.  If the order must be enforced against third parties, then a motion to the court may be more appropriate because an arbitral award is not enforceable against third parties.  In Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819 it was held that an arbitrator did not have authority to grant a mareva injunction against a third party. However, it still may be necessary to first obtain an order against the opposing party from the arbitral tribunal, to show that the arbitral remedy has been exhausted and that the opposing party is bound by that order.

4.  If the order must be enforced out of the jurisdiction of the place of the arbitral tribunal, a court motion may be more appropriate in order to obtain an order that another court will enforce.  An interim arbitral order which is not a final award of the arbitral tribunal may not be enforceable outside the place of the arbitration. While section 9 of the Ontario ICAA says that an order of the arbitral tribunal for an interim measure of protection is subject to the provisions of the Model Law as if it were an award, a court in another jurisdiction may not consider it to be so.  So the law of the place of the arbitration and the place where the interim order of the arbitral tribunal will have to be enforced must be considered to determine whether the interim award will be enforceable.

Commencing an arbitration is not a simple process. There are at least seven matters to consider before doing so. By thinking about them beforehand, the claimant can be ready to bring the claim to a successful conclusion, at least from a procedural standpoint.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10.

Arbitration  –  Commencement  –  Appointment of Arbitrators   –  Limitation Periods  –  Mediation- Jurisdiction  –  Interim Relief

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                               November 18, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

When Is A Mediation Agreement Enforceable?

One of the most difficult issues in the law of alternative dispute resolution is whether a mediation clause creates an enforceable obligation.  That issue has an impact on related issues and rights.  If a party gets the issue wrong, it may miss a limitation period or affect its right to rely upon an arbitration or exclusive jurisdiction clause.

In recent articles I have discussed two recent decisions of the Ontario Court of Appeal in which that court apparently arrived at conflicting decisions about whether a mediation clause created an enforceable obligation.  The English Court of Appeal considered this issue in its recent decision in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A..

The Sulamerica decision is more famous for its holding that the law applicable to an arbitration clause is the law of the place that the parties designate as the seat of the arbitration, not the law that they designate as the law of the contract.  But hidden in the back of the decision is another important conclusion, namely, that a mediation clause is not valid unless it contains sufficient minimum details to make it enforceable.

In Sulamerica, the enforceability of the mediation clause affected whether the insurer had properly commenced arbitration proceedings. The insurance contract provided that the law applicable to the contract was the law of Brazil and that the courts of Brazil were the exclusive jurisdiction for the proceedings relating to the contract. In addition, the contract contained an arbitration clause, condition 12 of General Conditions of the contract, which stated that the seat of the arbitration was London, U.K..

The insurers gave notice of arbitration, asserting that the insured’s claim was not covered by the contract. The insured commenced an action in Brazil for an order that the insurers were not entitled to submit the dispute to arbitration and obtained an injunction restraining the insurers from commencing an arbitration proceeding. The insurers then applied to the court in the U.K. for an order restraining the insured from continuing with the proceedings in Brazil.

The insured said that the law of Brazil governed the arbitration clause and that by the law of Brazil, its participation in the arbitration was voluntary, not mandatory. The insurers said that the law of England applied to the arbitration clause and that under English law, arbitration was the exclusive remedy to determine the dispute, that the jurisdiction of the arbitral tribunal was mandatory not voluntary, and that the insured would be bound by the decision of the arbitral tribunal.

The English judge of first instance held that English law applied to the arbitration clause and issued an injunction against the further prosecution of the Brazilian action by the insured, and the English Court of Appeal upheld that decision.  In doing so, the Court of Appeal may be seen as resolving a conflict of decisions in the English courts.  The result appears to be that, absent other evidence or factors, then in the face of a contest between the law of the contract and the law of the seat of the arbitration as to which law governs the arbitration clause , the latter will win out.

That part of the Sulamerica decision has been well discussed by the commentators. But there is another part of the decision which could be equally important.

Condition 11 of the insurance contract – the one immediately prior to the arbitration clause- required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, that mediation was a condition precedent to arbitration under that regime and, accordingly, the arbitration proceeding was premature and should be dismissed on that ground alone.

Condition 11 of the contract contained five paragraphs and some 31 lines, so it was not a “bare-bones” provision. It did not prescribe any particular mediation process, but it did clearly state that “the parties undertake that, prior to a reference to arbitration, they will seek to have the dispute resolved amicably by arbitration.” The clause contained an elaborate provision relating to confidentiality, stated the means by which the mediation could be terminated and stipulated a 90 day period for the mediation to be conducted from the date that one party started the mediation. The clause dealt with the sharing of the costs of the mediation. All in all, not a bad mediation clause.

But not good enough to be enforceable, according to the Court of Appeal.  It dismissed the insured’s submission on the ground that the mediation clause was not sufficiently precise to be enforced. It held as follows:

“…condition 11 does not set out any defined mediation process, nor does it refer to the procedure of a specific mediation provider. The first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question.  I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process. The most that might be said is that it imposes on any party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but the content of even such a limited obligation is so uncertain as to render it impossible of enforcement in the absence of some defined mediation process.”

The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11.  The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”

This conclusion raises a number of difficulties:

First, mediation is usually considered to be a consensual process requiring no agreement on process. If that is so, it is difficult to see why certainty of process is an essential element for its validity.  In Sulamerica, the English Court of Appeal has applied to the details of the mediation process the certainty requirements found in the law of contract which relate to the making of a contract. Is that necessary or appropriate? If the mediation process is voluntary, why is the agreement to mediate not sufficient?  If a party does not want to mediate, it can immediately state that position and the mediation may be at an end, but why should the parties not be obliged to at least take that step without further agreement on the process?

There is an ongoing debate, at least in North America, about the effort that a party to a mediation agreement must demonstrate before it has complied with a duty to mediate. Some say none; some say that there must be at least some good faith effort to mediate. But the Court of Appeal appears to pre-empt that debate by requiring that the details of the mediation process must be sufficiently clear from the beginning before any obligation to mediate can come into being.

Second, it seems unlikely that most mediation clauses satisfy the “sufficient certainty” requirement established by the Court of Appeal.  In order to do so, it is likely that the mediation agreement will have to refer the mediation to an arbitral or mediation institute. Agreements to engage in ad hoc mediation may, almost by definition, be unenforceable since those sorts of agreements usually leave the parties with the flexibility to choose the mediator and the “style” and procedures adopted by a particular mediator. Even mediation institutions will have to review their rules to ensure that they are “sufficiently certain”.

Third, different courts may have different views on this issue.  Those views may have a dramatic impact on limitation periods.  If an obligation to mediate arises, then the limitation period may well be extended.

As I noted in my article dated July 17, 2011 the Ontario Court of Appeal held in L-3 Communication Spar Aerospace Limited v. CAE Inc that an enforceable obligation to mediate had arisen in that case and accordingly the cause of action did not accrue and the limitation period did not start to run until the mediation was over.

In L-3 Communications, the agreement in question contained no details about the mediation process.  It simply stated that when the parties “had not agreed” then they could proceed to arbitration.  The Ontario Court of Appeal found that was sufficient to create a duty to mediate so that the cause of action did not accrue and the limitation period did not start to run until that occurred.  Had the Ontario Court of Appeal applied the logic of the English Court of Appeal in Sulamerica, presumably it would have concluded that there was no enforceable mediation clause, and the plaintiff’s cause of action accrued once the conditions for liability had occurred without any necessity for those conditions to include mediation.

As I noted in my article dated May 5, 2012, in another decision of the Ontario Court of Appeal, Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, that court held in 2012 that wording similar to that considered in the L-3 Communications decision did not give rise to an enforceable obligation to mediate.  The result in Federation Insurance appears to be different than the decision in L-3 Communications and more consistent with the decision in Sulamerica. 

All of the above may leave those drafting agreements wondering about what exactly to put into a mediation agreement to make it binding.  It may leave those suing to enforce rights under those agreements wondering whether to first start an action or mediate.  The decision to sue or mediate first may, like in Sulamerica, simply affect or delay the determination of which tribunal – court or arbitrator – is the proper tribunal. But more troubling is the limitation problem.

Making the decision to mediate, and not to commence the action, may result in the limitation period being missed.  With this risk, a party may be well advised to “sue first and mediate later”, unless the opposing party agrees to extend the limitation period in the meantime.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th edition, Chapter 10, part 6

Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648

Arbitration – Mediation – Enforceable Agreement – Choice of Law – Choice of Forum – Limitations – Insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                       July 5, 2012

www.constructionlawcanada.com

www.heintzmanadr.com